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Financial Firms’ Bid to Tap into Retail Trading Hinges on Navigating Generational Differences – Nasdaq

This article was originally published on Curatia.com.

In the retail-trading revolution’s early days, many financial firms gave retail investors a wide berth owing to the shifts they caused in markets. Now, though, as the trend’s staying power comes into focus, asset managers, ETF issuers, and financial advisors are joining brokerages and market makers in racing to grasp its contours with the hope of tapping into it.

In that quest, understanding how retail investors have adapted to the digital era — and how their investing habits change with age — is crucial to success. A recent Nasdaq survey offers insights including young retail investors’ tendency to check their portfolios more often, spend more time researching investments, and embrace ETFs — trends key to developing offerings that help retail investors grow along with their portfolios.

Bright Future

The sun may be setting on meme-stock mania, but the future of retail investing is brighter than ever. 

In fact, as Nasdaq chief economist Phil Mackintosh noted, retail-trading volumes flirted with records in January even as the S&P 500 shed 9.2% of its value. During that stretch, retail investors eschewed meme and penny stocks in favor of blue chips and ETFs. 

Moreover, retail investors’ share of global AUM is expected to rise from 52% last year to 61% by 2030. The forecast has financial firms mulling how they can tap into burgeoning retail-trading demand as well as stoke its growth.

Already, a new generation of retail brokerages has seized on the seismic industry shift to commission-free trading and the ubiquity of smartphone apps to unlock a younger cohort of investors with unprecedented speed. Robinhood nearly doubled its user base to 22.7M in 2021. 

The average age of those users was 31 — more than two decades younger than the average investor age of 52 at established brokerage Charles Schwab. However, Robinhood’s average account size is just $3,500 compared to a $240,000 average account size at Schwab.

Core Conundrum

The figures highlight a core conundrum of the retail-investing revolution: How can firms not only attract retail investors but also keep them engaged over time and steer them toward strategies that accumulate wealth?

A recent Nasdaq survey on retail investors’ shifting profile and generational tendencies suggests solutions. 

The survey found that younger investors spend more time checking their portfolios and researching investment opportunities than their older counterparts. 48% of Gen Z investors check their portfolios several times a day — a figure that declines to 39% for millennials, 16% for Gen X investors, and 10% for baby boomers. In addition, seven in ten Gen Z investors spend at least an hour researching an investment, versus just 38% of baby boomers. 

Retail investors also have gaps in their knowledge of financial analysis and trading. 43% of those surveyed were unaware of the convention of comparing a fund to an index. A quarter of respondents were unfamiliar with limit orders.

The findings indicate retail investors could benefit hugely from the availability of research and in-app educational materials. Such solutions could promote sustained engagement while coaxing investors to branch out into new product types and asset classes like exchange-traded products. 

Research and educational materials could also be a financial win-win for firms and investors.

“By teaching investors to conduct due diligence, consider their investment objectives, use techniques like benchmarking in evaluating their investing options, and leverage limit orders when trading, firms can encourage the prioritization of long-term wealth accumulation – Nasdaq Head of US Exchange Traded Products Giang Bui said. “Such steps would build investor trust and minimize conflicts of interest while enhancing long-term profitability.”

They could also help firms bridge the generational divide that’s long vexed consumer-facing financial platforms. While all platforms face the challenge of how to retain customers as they age, it’s a particularly thorny problem in finance, where younger users tend to be more comfortable with the latest technologies.

Experts have also historically recommended that investors shift their portfolio weightings from stocks to bonds to generate income and pare risk as retirement approaches. That often leaves platforms geared toward a particular asset class trapped in generational niches. 

And, more recently, the introduction of mobile-app trading has segmented younger and older investors by platform. Newcomers like Robinhood, Betterment, and Wealthfront have captured market share among younger investors. 

Nasdaq’s survey found that 64% of Gen Zers use Robinhood, versus a mere 7% of baby boomers. Fidelity has been an exception to that trend. It is used by 37% of retail investors overall and at least 29% of investors in each generation.

Generational Tendencies

Understanding generational tendencies could also light the way for financial firms eager to develop and market offerings that engage a new generation of investors in the quest to make markets more accessible and inclusive.

Familiarity with specific product types varies widely by generation. Among baby boomers responding to Nasdaq’s survey, 55% professed little or no familiarity with ETPs, compared with 37% in Gen X and 14% in Gen Y. Overall, the proportion of respondents investing in ETPs (57%) is surprisingly similar to that investing in cryptocurrencies (47%). 

The figures suggest ETPs have room to grow, especially with baby boomers, who may not be aware of the existence of, for example, bond funds that align with the investment objectives experts have historically recommended for them. 

Asset managers could meanwhile benefit from educating younger investors about the intricacies of the bond world as they age. Retail investors have already demonstrated an ability to learn about new asset classes through their embrace of options, which 39% now trade.

Choosing the right medium is critical to reaching those investors whose preferred information sources for making investment decisions vary by generation. 

While baby boomers rely primarily on financial advisors (66%) and finance-specific publications (57%), Gen Zers also look to online discussion boards (74%) and social media (67%) — sources used by just 14% and 7% of baby boomers, respectively. 

Based on that data, issuers of bond funds may prefer to reach investors through financial advisors and finance-specific publications, while those marketing thematic funds in areas like crypto, tech, and ESG popular with younger retail investors may wish to direct their dollars to forums and social media.

Those revelations underscore the importance of understanding generational tendencies in unlocking retail investing’s potential — a trend that promises to make markets more accessible and inclusive for current generations as well as those to come. 

To learn more, read Nasdaq’s full retail investor survey, “ETPs are Empowering the Next Generation of Investors.”

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